Borrowing from Friends and Family Newport RI

When starting up a new business or making an investment, entrepreneurs may well find themselves turning to family members or friends for some much-needed funds. This is anything but uncommon; some of the most well-known companies in the country were founded using the capital of friends and family. Richard Branson received a loan from a generous aunt to start Virgin Records, Sam Walton founded Wal-Mart with funds lent by his father-in-law and Atlantic Records founder Ahmet Ertegun borrowed money from his family’s dentist. Friend and family loans can be an integral part of the entrepreneurship process. In fact, such loans are the second most popular source of start-up capital after self-funding, according to Entrepreneur.com.

But be warned: There can be a great many dangers along the way. Entrepreneurs who borrow money that they never repay could wind up forever destroying once-great friendships or creating devastating family feuds.

“There is the risk to the relationship,” Helen Payne Watt, director of content for Virgin Money , a company that manages loans between friends and family, said. “It’s a perception that a lot of people have. Their first gut reaction is, ‘Oh no, you shouldn’t do that!’”

Friends and family often offer lower interest than banks Even so, loans from friends and family offer some substantial benefits. Rates are typically lower, terms tend to be more flexible and the approval process is significantly simpler than with traditional loans.

“When there are loans between individuals who know each other there’s no application process, there’s no filling out of forms, there’s no credit check. All that is done based on the relationship,” Watt said.

So how can eager entrepreneurs keep their personal relationships from going belly-up when borrowing start-up capital? Here are a few tips to consider:

Choose lenders carefully.

Some friends and family members may not be capable of offering “no strings attached” loans, and may consider someone's indebtedness to them as a free license to meddle with their business and their life. Any friends or family members who may have ulterior motives for helping an investor out should be left off the list, according to Entrepreneur.com. Additionally, it can be worthwhile to “think outside the box” when considering potential sources of capital, according to Expert Business Source, an online publication dedicated to small business issues. Parents, aunts and childhood friends are only a small portion of the potential lender pool. Consider extended relations and family acquaintances as well.

Present a solid, professional business plan.

“Much like explaining the business to an investor, a borrower should put together a short presentation for family and friends,” according to Expert Business Source. Although friends and family may n...

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